Can Messier do without a network?

Analysts say USA buy still leaves Vivendi behind majors

By

RussBritt

NEW YORK (CBS.MW) -- Jean-Marie Messier was all smiles in announcing the "repatriation" of USA Networks Inc. to his Vivendi Universal media company.

Messier felt he had finally accomplished the necessary task of getting essential distribution outlets for his Universal Studios. The USA deal, coupled with a deal giving him a slice of EchoStar Communications, was all he needed to get his content out there.

But then the cherub-faced Vivendi chairman grew defensive when talk turned last week to whether he would ever be interested in a broadcast network.

At first Messier was asked whether he would become a U.S. citizen, which may be a necessary step for the French-born chieftain to assume control of a slice of the nation's airwaves. Messier replied emphatically that his Paris-based company had no intention of renouncing the homeland.

"Can we stop asking -- when we are presenting to you what we think is a decisive step -- 'But please, don't you have another one in mind?'" Messier said tersely. "No, we do not have another one in mind."

Despite Messier's strong words, the question will remain as long as the colorful chairman of Vivendi
V, +0.39%
intends to become one of the big boys on the U.S. media block.

Analysts say Vivendi's purchase of USA Networks -- far from being the biggest cable franchise around -- won't be enough to put it on par with the likes of AOL Time Warner
AOL
or even Walt Disney
DIS, +0.56%
in terms of distribution might.

"They're claiming they're now in the upper tier of U.S. media," said Michael Nathanson, analyst for Bernstein & Co. "I think that's a stretch."

The question is whether Vivendi wants to play that game -- some observers assume Messier does despite what he says -- and if it needs to.

"From a growth perspective, they're in pretty good position," said Jordan Rohan of SoundView Technology Corp. "But they're not a proven broadcast outlet."

Took care of business?

When he controlled the Universal assets as chief of Seagram Co., Edgar Bronfman sold USA to Barry Diller and his Home Shopping Network for $4.7 billion in 1997 while retaining a 43 percent stake in the company. Under the latest deal, Diller sold the assets back to Messier's Vivendi for $10.3 billion.

Messier says the company addressed its distribution outlet needs by purchasing USA's film and television operations, which include two cable networks, the USA and Sci Fi channels.

Messier says Vivendi needs a year to digest what it has purchased. Along with USA Networks
USAI, +0.41%
a number of companies came under the Vivendi umbrella in 2001, including Houghton Mifflin book publishing and a 10 percent stake in fast-growing EchoStar.
DISH, +1.86%

Rohan says that strategy makes sense. Messier does need to take time to evaluate his year-old media empire before embarking on making it even bigger.

But it seems implausible that Messier, 45, will be able to stay out of the merger game for an entire year, Rohan said, particularly if an opportunity arises.

"He's not in charge of the M&A timetable. Something could happen," Rohan said.

And there remains the Diller factor. Diller, who will take control of Vivendi Universal's film and television operations, twice tried to obtain a broadcast network at USA, only to be turned away. Many expect him to try again.

The most likely candidate would be NBC, now under the control of General Electric Co.
GE, -0.80%
Diller tried to buy NBC in 1998 but Bronfman thwarted the deal. Universal Studios had the power to veto such a deal.

"That right now would look like the next big broadcast transaction," said David C. Joyce, analyst for Guzman & Co. "(But) I don't think GE has any need to sell that."

Diller also made a play for CBS, which eventually was bought by Viacom Inc. Viacom
VIA, +1.26%VIA
is a major investor in MarketWatch.com, the publisher of this report.

Getting bigger

While its merger with USA's film and TV operations may not quite put Vivendi near the top in distribution, it does lend it more heft.

Vivendi, which commands a market value of $59 billion, now is solidly in third place behind AOL and Disney and ahead of Viacom and News Corp.
NWS, +1.43%
in terms of revenue.

With revenue an estimated $23.5 billion a year (including USA's operations), Vivendi plays in the same league as second-place Disney, which had $25.4 billion last fiscal year. Including Vivendi's water business and other non-media assets, it's a $46 billion empire.

There's also something to be said these days for a company that doesn't own a major television property, analysts say. Vivendi has managed to shield itself from the advertising downturn by mostly providing content.

Of the leading media companies, only Viacom saw its stock rise more during that period.

While some analysts say the selloff of USA assets in 1997 to Diller for about half of what was paid to get them back was a raw deal, Wall Street seems to think it might not have been so bad after all.

When word of the deal first surfaced, Vivendi shares slipped slightly. But on Dec. 17, when it was confirmed, its stock tacked on $2 when trading opened that day and it has been trading in the $54 range since then. The issue closed up Thursday $1.21, or 2.2 percent, at $54.06.

Messier and Diller say much of the deal was paid for by the stake Vivendi held in USA. That share's value rose as USA's price hiked over the last four years as its market cap grew to $8.5 billion. Vivendi ended up shelling out $1.5 billion in cash, the company said.

USA shares have more than doubled in value in that time. In early 1998, shares were at roughly the $12 level. On Thursday, USA closed at $27.17, up 32 cents.

First deal a concern

But analysts are less concerned with Vivendi's repurchase than with the deal Bronfman forged when he controlled the USA assets.

"No one ever understood the benefits of outsourcing your TV production business," said Jeffrey Logsdon, analyst at Gerard Klauer Mattison. "The obvious hope is they will be able to create more value over time to enhance their shareholders' value."

Whether that can happen is in question. USA has lost some key programming such as "Star Trek" reruns and World Wrestling Federation broadcasts and thus has slipped in ratings.

Still, Vivendi is not at that much of a disadvantage, some analysts say. The largest media company in the world right now is AOL Time Warner, which owns a small TV network, albeit with a number of significant cable properties such as CNN.

Guzman's Joyce says that Vivendi has more of a global presence than its contemporaries, with a stronger foothold in Europe than others. For that reason, the company may be better equipped to weather regional downturns. And don't forget its immunity to the ad market since it's had no network or other business that relies heavily on sponsors.

"They're on track to hit the 30 percent to 35 percent (cash flow)," Joyce said. "They do have strengths there."

Logsdon pointed out there are other disadvantages to network ownership.

"You rarely hear of their ownership of their network being an advantage," Logsdon said of AOL. "I'm not sure of the real value creation in the ownership of local stations."

Local station purchases are usually part of network ownership. That is where Vivendi is likely to run into a roadblock since the Federal Communications Commission forbids foreign ownership of local stations.

"That may be a luxury they could do without," Logsdon said. "I sure hope they don't have to do more later on. They've done quite enough already."

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